'Legitimate' Firms May Be Sued Under Rackets Law, High Court Rules

By RONALD J. OSTROW

July 2, 1985 12 AM PT

Times Staff Writer

WASHINGTON — A narrowly divided Supreme Court on Monday upheld the unfettered use of a federal racketeering law to bring private civil suits for treble damages against respected businesses as well as mobsters.

Although the measure has been used in recent years in attempts to label as racketeers such firms as E. F. Hutton, Citibank and General Motors, the court said that invoking the racketeering law “leaves no greater stain than do a number of other civil proceedings.”

In a 5-4 opinion by Justice Byron R. White, the court overturned a ruling last year by the U.S. 2nd Circuit Court of Appeals in New York that sharply limited suits brought under the Racketeer Influenced and Corrupt Organizations Act, known as RICO.

The appeals court had required that defendants must have been convicted of a criminal offense and that the plaintiff must have alleged “a racketeering injury” before the act could be used.

Justice Thurgood Marshall, in a dissent, said the majority’s interpretation Monday “quite simply revolutionizes private litigation,” with no indication that Congress had considered doing so in 1970, when the act became law.

Surge in Such Suits

The high court’s ruling (Sedima v. Imrex Co., 84-648) was handed down at a time when civil suits under the act have surged against firms not normally thought of as linked with organized crime. Lawyers have attempted to use the act’s provisions to obtain three times the damages that their clients claim to have suffered in wire and mail fraud or bankruptcy and securities fraud.

An American Bar Assn. task force, analyzing the 270 RICO cases before trial courts, found that 40% of them involved securities fraud, 37% common-law fraud in a commercial or business setting and only 9% “allegations of criminal activity of a type generally associated with professional criminals.”

The court noted that the act “makes it unlawful for ‘any person’--not just mobsters--to use money derived from a pattern of racketeering activity to invest in an enterprise, to acquire control of an enterprise through a pattern of racketeering activity or to conduct an enterprise through a pattern of racketeering activity.”

The justices noted that the lower court had expressed its “distress at the ‘extraordinary, if not outrageous,’ uses to which civil RICO has been put. Instead of being used against mobsters and organized criminals, it has become a tool for everyday fraud cases brought against ‘respected and legitimate enterprises.’ ”

Up to Congress

But, rejecting this reasoning, the Supreme Court said, “Yet Congress wanted to reach both ‘legitimate’ and ‘illegitimate’ enterprises. The former enjoy neither an inherent incapacity for criminal activity nor immunity from its consequences.”

The justices acknowledged that use of the act “is evolving into something quite different from the original conception of its enactors,” but they said it was up to Congress, not the courts, to make any correction.

“It is true that private civil actions under the statute are being brought almost solely against such (respected business) defendants, rather than against the archetypal, intimidating mobster,” the court said. “Yet this defect--if defect it is--is inherent in the statute as written, and its correction must lie with Congress.”

In the case reversed by the court, Sedima, a Belgian corporation, was involved in a joint venture with Imrex Co. to provide electronic components to another Belgian firm. Sedima alleged that Imrex was presenting it with inflated bills--and cheating Sedima out of part of its proceeds in the venture.

Under the RICO law, it alleged mail and wire fraud and conspiracy and sought three times the $175,000 that it claimed to have been over-billed.

A U.S. District Court dismissed the complaint, and the U.S. 2nd Circuit Court of Appeals affirmed that ruling, holding that Sedima must allege that it specifically suffered a “racketeering injury . . . caused by an activity which RICO was designed to deter.”

The appellate court also held that the complaint was defective for not alleging that the defendants already had been criminally convicted of mail and wire fraud or of a RICO violation.

White was joined in the majority opinion by Chief Justice Warren E. Burger and Justices William H. Rehnquist, John Paul Stevens and Sandra Day O’Connor. Joining Marshall in dissent were Justices William J. Brennan, Harry A. Blackmun and Lewis F. Powell Jr.

Data General Appeal Rejected

In another decision, the court refused to hear an appeal by Data General Corp., which was found guilty by a federal appeals court of antitrust violations.

Data General was sued by Digidyne Corp. and Fairchild Camera & Instrument Corp. for refusing to sell its Nova operating system software unless buyers also bought Nova computers.

A California jury determined that Data General violated antitrust laws by imposing the “tying” arrangement on its customers. A federal judge, however, threw out the verdict on grounds that the company lacked the economic power to restrain competition.

The U.S. 9th Circuit Court of Appeals reinstated the jury’s verdict last year.

Justices White and Blackmun voted to hear arguments in the case, but four votes were needed to grant such a review to Data General’s appeal.